American Mortgage Blog

There is plenty of disagreement about when the “financial crisis” began, and what caused it. Some opinions go back ten years or more, when elected officials encouraged Fannie Mae and Freddie Mac to buy loans backed by borrowers who were not traditionally credit worthy. Others say it began in 2007 or 2008, when several large profile companies went bankrupt.

As the U.S. economy continues to bump along toward year-end, there are plenty of suggestions on how to repair it. And many of those involve the housing and mortgage market, especially with the recent HARP refinancing news. If politicians in Washington could ever put their differences aside, there are some very useful things that might help.

Sometimes borrowers ask, “Why don’t your rates match the ones I see in the newspaper?” It is easy to quote rates out there, but every borrower should remember that their loan is different, and that often the advertised, or publicized, rates are slightly higher due to a number of factors.

With the downgrade by Standard & Poor’s of debt issued by the United States, it reminds us of the old adage: “the higher the risk, the greater the return.” Whether it is betting on a long shot at the race track or buying a penny stock and hoping it doubles in a few weeks, investors are well acquainted with the way the system works. Now only four major countries now have the AAA rating from S&P: Canada, Germany, France, and the United Kingdom.

Our borrowers will often ask their agent, “Are mortgage points good or bad?” For starters, let’s define “points,” as they are often misunderstood. A mortgage point is defined as a percentage of the loan amount, so if you take out a $150,000 mortgage, one (1) mortgage point would be $1,500. That is pretty simple, but there are different definitions of a mortgage point, as both mortgage discount points and loan origination fees are often thrown under the same umbrella and they are not the same nor treated equally.

Check with your agent - mortgage rates are the lowest they’ve been all year, despite all of the uncertainty surrounding the problems our Congress had with the budget, problems several European countries are having with their debt, and the recent downgrade of the U.S. debt by one of the rating agencies. Normally rates go higher when “the market” is nervous, but in this case the economic news points to U.S. economy that is slow enough that it won’t support higher rates. But now what? Should originators be pushing borrowers to wait until they lock?

Two press releases recently turned some heads in the lending and housing industry. First, home builders’ sentiment is showing some signs of life, although it is still dragging. One official said, "The improvement in builder confidence in July is a positive sign that the outlook perhaps isn't quite as bleak as was feared in June.” At the same time, the BuildFax Remodeling Index (BFRI) which tracks building permits and construction starts indicated that May had the highest level of remodeling activity since the Index was first introduced in 2004! (The BFRI is derived from building and permitting information from 4,000 cities and counties throughout the country assembled by BuildFax, a division of BUILDERadius.)

Late last week the June employment numbers were released by U.S. Bureau of Labor Statistics. "Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2%, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month. Government employment continued to trend down." What does this mean for mortgage rates?

It is tough to find positive economic news in the latest jobs report, but for interest rates it is a different story. Following payroll gains averaging 215,000 per month from February through April, employment has been essentially flat for the past 2 months. At least we're still adding jobs though, not losing them, albeit at a very slow pace.  This offers more confirmation that our economic recovery is facing strong headwinds as we cross into the 2nd half of the year.

Most borrowers are very well aware of the stock and bond markets. In fact, most people have a relatively fixed number of investment opportunities available to them. These include keeping their money in cash, buying property, buying bonds, or buying stocks. Currently anyone keeping their money in cash (in the bank, for example, in a savings account) knows that the interest that they are earning is very little – probably near 0%. But it is safe, up to the insured FDIC limits. Of course, no one knows what the stock markets are going to do over the next year, or the next ten years. But currently, if a person was to purchase the 30 stocks that make up the Dow Jones index, the dividend yield on the Dow is approximately 3%. If one were to buy a 10-yr Treasury Note, it pays an interest rate of about 3.00%. Therefore the dividend yield is about the same as the current yield on the benchmark U.S. Treasury note. Of course, both go up and down on a daily basis.

Our agents are often asked about the impact of economic news on interest rates. Some economic releases come out once a month (like employment data, or the Consumer Price Index) but other releases come out more often (weekly Initial Jobless Claims, for example, every Thursday morning). Your agent monitors these economic releases, since many of them do indeed impact mortgage rates.